Retail market update Autumn 2023
The retail environment remains challenging.
The rising cost of living, and recent disappointing weather have led to a further tick down in overall sales.
Yet at the same time, there hasn’t been a sharp deterioration, and this may be partly attributed to the partial recovery in consumer sentiment since the beginning of the year, even with all the economic challenges. The GFK consumer sentiment index is currently at -25. This is still in negative territory, but marks a notable rise from -47 in January.
Demand is rising for retail space. Footfall has risen since the pandemic, and this has driven an increase in demand for retail space in the last few quarters, acting as a stabiliser to vacancy rates which rose sharply between 2020 and 2022 as consecutive lockdowns and Covid-19 restrictions led to store closures.
The UK vacancy rate is at 2.9%, although this rises to 5.3% for shopping centres. In London, the vacancy rate is 2.6% as take-up reached a 12-month high in Q2 2023. This was underpinned by luxury brands upgrading to new stores, and experiential retailers moving to fill space left by more traditional retailers. The return of tourists to the capital also bolstered demand. But further out from the luxury retail hubs, the rising cost of living is impacting consumer demand, and some retailers are continuing consolidation plans, which will limit demand for retail space, and put downward pressure on rents.
Retail rents have declined before and since the pandemic, but the scale of the declines has eased over the last 12 months. Rental declines have been most notable in shopping centres, with an average 27% fall in rents since 2018 and they continue to edge downwards. Rents have also fallen on underperforming high streets. Even the most prime retail spots have not been immune, with average rents in Bond Street and Oxford Street in London down 30% since the start of the pandemic, according to CoStar.
The cost-of-living crisis may put more downward pressure on rents over the next year, but this will in some way be limited by very tight supply. In some cases, supply is being taken out of the market as retail is redeveloped for alternate uses, such as residential or co-working. Fenwick on London’s New Bond street will be redeveloped as a mixed-use asset.
As the economy starts to recover next year and into 2025, average rental growth will edge back into positive territory, showing very modest rises. The benefits for the retail sector as a result of business rates reliefs may mean rents are more sustainable in the medium term, especially among the larger retailers who will benefit the most.
Retail space where rents have become very competitive could also start to outperform. In-town shopping centres will continue to be challenged on rents however, as working from home and online shopping combine to impact footfall and demand.
Investment volumes were muted in Q2. The continued fall in retail sales and rising cost of living has acted as a drag on investment activity after a busy start to 2022. The market has been characterised by several large supermarket transactions. In London, investment activity tailed off in Q2, but there will still be interest from investors looking for safe-havens in prime retail assets, or for redevelopment plays. Investment volumes are also muted in Manchester.
Yields have softened since the middle of last year, but have stabilised in the last few months, and will stay static through the rest of the year. The slide in capital values last year, a decrease of some 14%, has largely come to an end, with capital values down just 1% in the H1, according to Capital Economics. Looking ahead to positive rental growth in 2025/26, this will lift capital growth, and will push up total returns from around 5.8% this year.
Retail: Key investment transactions
| Property address | Location | Date | Building size sq ft | Yield (%) | Sale price (£) | Buyer |
|---|---|---|---|---|---|---|
| 32-33 Old Bond W1 | London | Q2 2023 | 14,509 | 3.2% | £105m | The Swatch Group |
| 31-51 Liverpool N1 (Sainsburys) | London | Q3 2023 | 67,426 | 4.1% | £56.3 | DTZ Investors |
| 36-42 Kings Road SW3 | London | Q1 2023 | 8,762 | 3.7% | £36m | Cadogan Estates |
| 641 Hyde Road M12 | Manchester | Q2 2023 | 52,842 | 6.3% | £4.5m | Buccleuch Property |
| Mill Wood Drive (Tesco) | Worcester | Q2 2023 | 47,397 | 6.0% | £38.3m | Supermarket Income REIT |
Key statistics
| Retail: Data to end Q2 2023 unless otherwise stated | General retail |
|---|---|
| Current quarter (last quarter / 5yr ave) | |
| Occupier | |
| Availability rate (%) | 3.22% (3.27%/4.0%) |
| Vacancy rate (%) | 2.9% (3.1%/2.7%) |
| Rental growth (12-month growth rate) | 0.0% (0.2%/-3.6%) |
| Quarterly take up (sqft) | 3.6m sqft (4.2m/5.2m) |
| Supply | |
| Completions (gross delivered sqft) | 501,000 (819,000/1.7m) |
| Total under construction (sqft) | 5.2m sqft (5.9m/8.7m) |
| Investment | |
| Quarterly sales volume £m | £1.2bn (£2.3bn/2.2bn) |
| Average initial yield %* | 6.5% (6.5%/6.3%) |
| Prime Town High Street yield % August 2023 (Q2 2023) | 6.75% (6.5% – 6.75%) |
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